An Enticing Number
We wrote six months ago that adjustments in the consumer price index, the country's basic measure of inflation, might play a useful part in moving the federal budget toward balance. At that time, a bipartisan group of senators had put forward a balanced-budget plan that included such an adjustment.
Now a commission of economists appointed by Congress has formally recommended that the CPI be adjusted downward - twice as far as envisioned by the senators' group. This proposal stirs some optimism and considerable caution.
Optimism because a competent panel of experts has publicly highlighted and explained specific flaws in the current inflation number - things that are not adequately taken into account. These include the tendency of shoppers to substitute cheaper goods for more expensive ones, the increasing quality of many items (which means people get more for their money), and the shift to discount retailers.
Anticipated effect: somewhat lower monthly expenses for many Americans than those indicated by the market basket of goods put together by Bureau of Labor Statistics (BLS) researchers, whose work underlies the CPI. The corollary is that calculations based on the CPI - such as Social Security payments and the tax brackets that determine how much income tax people pay - are also somewhat off base. CPI-driven adjustments in these areas could bring the nation's deficit-elimination target closer by hundreds of billions of dollars over the next decade.
Now the caution. First, the commission members recommending a downward adjustment in the CPI were largely aware of this view before their panel started its work. There are credible experts on the other side too, who think the current measurement works fine. The BLS's statisticians are already adjusting their numbers to incorporate the factors highlighted by the commission. Their work should weigh heavily in any ultimate decision.
Further, any adjustment in the CPI should be but one element, and by no means the largest, in a balanced-budget strategy. Paramount is the hard work of compromise and cooperation, cutting costs and reallocating resources. Entitlements such as Social Security will have to be scrutinized, and any tinkering with them - whether a change in indexing or other means - will be opposed by lobbies for the elderly. Republicans and Democrats will dance around each other, hoping the other will seize this issue first.
But what else is new? The commission economists have just provided a slightly different tune. It should be listened to, and the final dance should be toward a budget plan that adds some adjustment in the CPI - probably significantly smaller than the 1.1 percent suggested by the commission - to a groundwork of spending adjustments that incorporates both fairness and frugality.